Sequester outlook: Deficit goal in sight, but economic toll is high

WASHINGTON — The latest budget impasse ushered in a new round of austerity Saturday, with the nation facing reduced federal services, canceled contracts and job furloughs and layoffs.

But lost in the talk of Washington, D.C.’s dysfunction is this fact: On paper at least, President Obama and Congress have reduced projected deficits by nearly $4 trillion over a decade — the widely embraced goal for stabilizing the national debt.

The spending cuts that began to take effect Friday — known as sequestration and totaling about $1 trillion through 2023 — come on top of $1.5 trillion in reductions that Obama and Congress committed to in 2011, mainly from the accord that averted the nation’s first debt default.

Nearly $700 billion more will come from tax increases on wealthy Americans, the product of the brawl in December over Bush-era tax cuts, and another $700 billion is expected to be saved in projected interest on the reduced debt.

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And so if the latest cuts stick, the two parties will have achieved nearly the full amount of deficit reduction over the next decade that economists and market analysts have urged. Yet the mix comes with substantial downsides.

It does not add up to the “grand bargain” the two parties had been seeking because it leaves virtually untouched the entitlement programs — Medicare, Medicaid and Social Security — responsible for projections of an unsustainably rising federal debt in coming decades.

“This is not a result that deals with our long-term debt problem,” said Vin Weber, a former Republican member of Congress. “The fact we’ve gotten to a $4 trillion deficit-reduction deal without tackling entitlements is almost a bad thing,” he added, if it lulls the public and the politicians into thinking the problem is solved.

The progress on deficit reduction over the past two years also will probably hamper the economic recovery and job creation. Private and government forecasters project the sequestration alone will cost about 700,000 jobs this year and shave at least a half percentage point from economic growth. The Congressional Budget Office now forecasts a falling deficit, but stubbornly high unemployment in coming years.

For Democrats, at least, the mix of spending cuts and tax increases in the package is another reason for disappointment. The deficit deals to date would yield four dollars in spending cuts for every one dollar of new revenues. Obama, as well as several bipartisan groups, including the one headed by Erskine Bowles and Alan Simpson, call for one dollar of tax increases for every two to three dollars in spending cuts.

It remains unclear how long the sequestration will last: It was designed to be so onerous that it would force a compromise on an alternative. But Obama and Republicans indicated Friday that the cuts would probably remain in place at least until the end of the fiscal year, Sept. 30.

Democrats, led by the president, express confidence that in coming months public pressure will force Republicans to relent on revenues, especially as cuts to the military begin to be felt. But Republican leaders have said they will stand firm against tax increases, suggesting they have won at least a temporary victory on reducing the size of government.

In his weekly address on Saturday, Obama said the Republicans had “decided that protecting special interest tax breaks for the well-off and well-connected is more important than protecting our military and middle-class families from these cuts.”

“I still believe we can and must replace these cuts with a balanced approach — one that combines smart spending cuts with entitlement reform and changes to our tax code that make it more fair for families and businesses without raising anyone’s tax rates,” he added.

In the Republican response, Washington’s Rep. Cathy McMorris Rodgers, said, “The problem here isn’t a lack of taxes. This year alone, the federal government will take in more revenue than ever before. Spending is the problem, which means cutting spending is the solution. It’s that simple.”

According to the nonpartisan Congressional Budget Office, total government spending is falling compared with the size of the economy, but it will rise again in the next decade. That growth will be driven by the entitlement programs as more baby boomers retire, not the so-called discretionary programs that are being cut.

And revenues, while reaching a high in dollar terms, remain below the average of the past 40 years as measured against gross domestic product.

The grand bargain that has eluded Obama and House Speaker John Boehner, the Republican leader in Congress, was supposed to mainly curb entitlement spending and raise revenues. Lesser savings would come from the discretionary programs that cover almost everything else the government does for defense and domestic purposes.

But Boehner, whose post is on the line, given anti-tax Republicans’ unhappiness with the December tax deal, vows he will no longer negotiate with Obama on overhauling the tax code to raise revenues for deficit reduction, although the revenues raised to date fall short of the amount he proposed in previous talks.

Nor will the Senate Republican leader, Mitch McConnell of Kentucky, who faces re-election next year in a state with a strong tea-party faction. He said Friday: “I will not be part of any backroom deal, and I will absolutely not agree to increase taxes.”

The president and congressional Democrats will not agree to reductions in Medicare or Social Security spending except in return for at least $600 billion more in higher revenues over 10 years, from shaving tax breaks for the wealthy and corporations.

That standoff has left the discretionary programs to bear the brunt of deficit reduction measures. Those domestic and military programs are so named because Congress has discretion to set spending levels annually in appropriations bills; entitlement benefits, in contrast, grow automatically unless changed by law.

J. Keith Kennedy, a former Republican staff director of the Senate Appropriations Committee, said, “The annual discretionary money is where you make your investments. And you decide every year where do you want to put your money to invest in the future — whether it’s education, or health care or infrastructure, or national parks or sending another rover to Mars.”

For two decades through the 1990s, G. William Hoagland, then the Republican staff director at the Senate Budget Committee, fought with Kennedy to get the Appropriations Committee to cut discretionary spending. But now, Hoagland said, “We have squeezed that turnip as far as we’re going to go, and that’s before sequestration. That is the component of the budget which, for all practical purposes, is the seed corn of the future.”